LNG Market Outlook by Flex LNG
The LNG shipping market tightened throughout the third quarter, and rates increased sharply in October following gradual increases since May.
This was due in part to strong LNG demand from China which helped to widen the arbitrage between spot LNG import prices in Europe, U.S. and Asia. This led to increased cargoes from the Atlantic basin and an associated increase of average sailing distances.
The current market dynamic is supportive for a further increase in rates during a seasonally strong period of the year. It is also important to note that a relatively small portion of the global fleet of LNGC operates in the spot market (less than 10%), which can result in periods of increased volatility.
The globalization of the LNG markets continues to develop with LNG increasingly being traded as a global commodity. Historically, intra-basin trade in the Atlantic and the Pacific has been a large component of the LNG shipping market.
This has begun to change as U.S. and Australian export capacity continues to ramp up, coupled with import countries’ strive to ease trading restrictions and new markets for LNG opening up with the help of FSRUs.
LNG export capacity continues to increase globally, and this has been a key driver of demand, creating a competitive LNG pricing environment, which encourages potential buyers and infrastructure projects and ultimately the adoption of LNG as a country’s primary energy portfolio.
As the market continues to evolve, increased price transparency, liquidity and flexibility where an increasing amount of LNG is sold on a spot basis and under contracts without destination restrictions, will all contribute to a more global and liquid market.
Global demand for seaborne LNG continues to grow throughout 2017. In the first nine months of 2017, 218 million tonnes of LNG were exported, up 12% over the same period last year. In the U.S., LNG has been exported to 26 countries, as compared to 12 in 2016. A total of 39 countries have imported LNG year-to-date 2017.
Demand growth has come primarily from Asia, with China, South Korea, India and Taiwan all showing strong annualized growth. In particular, demand from China has increased by over 43% year over year, in part due to a rise in contracted imports that may exceed actual end user demand.
Yet, the government of China has committed to diversifying its energy portfolio to focus on clean energy sources. This was recently affirmed by reports of a commitment by China to invest $43 billion to develop Alaska’s LNG sector.
Likewise, the new South Korean administration temporary closed coal mines over 30 years of age in June. These mines have temporary closures scheduled for three months per year in 2018 through 2021 before they are permanently shuttered in 2022.
Most of the future growth in world energy demand is expected to come from rapidly growing emerging economies, with a significant portion of this growth likely to stem from China and India. According to the International Energy Agency, global gas demand is expected to grow by 1.6% annually over the next five years, with China accounting for 40% of this growth.
Of the three primary energy fuels (coal, oil and gas) gas is the only one that is expected to continue to grow its relative portion of the share of the global energy portfolio. Significant LNG export capacity will come online over the next five years against this backdrop of growing demand for gas, which is expected to maintain LNG as a competitively priced energy commodity. This will in turn be a positive driver of demand for downstream product, LNG shipping, and LNG import solutions.
FLEX LNG expects the coming growth of LNG production and the expected growth in demand for natural gas in combination with the recent limited ordering activity of LNG Carriers to gradually tighten the shipping market over the course of the next 18 months.
As such, the Company is well positioned with six MEGI LNG carriers set for deliveries over the next 2-21 months. We believe that the strengthening market sentiment will continue and that our state of the art MEGI vessels will command a premium in the market.
The Company is actively marketing the LNG newbuildings in both the term and spot markets to secure an optimal position in the improving market.